11/19/2008

Goldman Lets Investors Exit Battered Fund

After losing about half of its value since it started last year, a Goldman Sachs distressed-debt fund is allowing investors to redeem all of their shares ahead of schedule, an option that limited partners in other hedge funds are sure to envy.

Goldman Sachs Liquidity Partners 3, which launched in the summer of 2007 with $1.7 billion of commitments, also gave investors an opportunity to stick with the fund in return for reduced management fees and zero performance fees for a limited period. Those wishing to contribute capital are also eligible for reduced fees.

But for LPs wanting out, Goldman is willing to waive a lockup provision requiring investors to leave their capital in the fund for at least two years. Goldman is outlining the options in a letter it expected to send to investors this week.

The fund, housed in Goldman Sachs Asset Management alongside other bank-run hedge funds, is overseen by James Clark, a partner. The vehicle's management team also includes Roberta Goss, who heads bank-loan investments at Goldman Sachs Asset Management.

Liquidity Partners 3, which invested in leveraged bank loans and subprime mortgage-backed securities, borrowed to boost its exposure to those markets. Toward the end of 2007, Goldman and many others believed the values of such assets were soon to recover. As it turned out, credit-market values were nowhere near their bottom, roiling the many players that began investing around that time. Loans issued to finance LBOs, for instance, have since dropped to 70 cents on the dollar from 85 cents. Subprime MBS also proved to have much more room to fall, with some mortgage securities now trading at pennies on the dollar.

Downward pressure remains on such assets, with some blaming the expiration of "mark-to-market holidays" for the latest declines. Since last year, banks have been financing the sales of their leveraged loans and other unwanted assets, and in doing so they have promised buyers that they would value the collateral at their purchase price - usually for a year to 18 months. Many of those seller-financed loans are now being written down to their market values, forcing funds to either put up more cash as collateral or hand the loans back to the banks.

Goldman's decision to let investors cash out contrasts with the decisions of a number of other credit hedge funds, which have suspended or limited redemptions. Some fund operators have "side-pocketed" assets considered too illiquid to sell at a fair price.

Distressed-credit investor Plainfield Asset Management, for instance, recently decided to set up a special-purpose vehicle to hold certain assets after receiving redemption requests totaling 33% of the assets in Plainfield Special Situations Master Fund. Meanwhile, Whitebox Advisors, a convertible-bond arbitrageur in Minneapolis, froze its funds as its prime brokers demanded more collateral.

Castle Hall Alternatives, a firm which assesses operational risk at hedge funds, this month released a report listing 75 hedge funds that have suspended redemptions, restructured terms or imposed gates.

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